The pass-through of fuel costs and previously announced sale of coal mines in Indonesia help reduce the risk of Tata Power?s business model by reducing its vulnerability to international coal prices. (AP)

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The Central Electricity Regulatory Commission (CERC) has awarded a long-awaited compensatory order in favour of Tata Power.

The order comes on the heels of stake sale in PT Arutmin coal mines, enabling the company to reduce the risk of vulnerability to international coal prices. Although we do not rule out an appeal on the order by distribution utilities, we maintain our positive bias on the company. We will review our add rating and target price of Rs 87 after considering the detailed order.

Unconfirmed media reports say CERC has awarded a compensation of Rs 330 crore for FY13 (R0.28/kwh) in comparison to losses of Rs 800 crore in FY13 (R1,160 crore in 9MFY14). We factor in losses of Rs 1,200 crore (R5/share) at the Mundra UMPP and the proposed compensation of Rs 0.52/kwh would help absorb the losses at the project and accrue as much as Rs 22/share for Tata Power.

The compensation of Rs 330 crore matches the amount estimated by the Deepak Parekh Committee report though a compensation of Rs 0.52/kwh going forward is marginally lower than the Rs 0.59/kwh proposed initially, possibly due to a revision in the prices of imported coal.

The pass-through of fuel costs and previously announced sale of coal mines in Indonesia help reduce the risk of Tata Powers business model by reducing its vulnerability to international coal prices. On conclusion of the sale of coal assets in Indonesia and the compensation for the Mundra UMPP, Tata Power will move back to being a pure utility with ownership in power assets without exposing itself to the risk of volatile coal prices.